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No. 365, February 2000

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American Companies in Japan


FINANCIAL SERVICES

The traditional rap about the venture-capital market in Japan is that it is not well enough developed to give entrepreneurs the support they need. That is starting to change, in part because foreign companies see money to be made. One of them is GOLDMAN, SACHS & CO. In partnership with KYOCERA CORP., the big New York City investment bank has established a $285.7 million fund to invest in start-ups in the information technology, Internet and communications fields. The Kyocera Goldman Sachs Venture Fund expects to invest up to $14.3 million in each company selected. These start- ups will get more than just financial help; they also will receive management backup and even help on the technical front. Interestingly, this is the first time that Goldman, Sachs, which is putting up two-thirds of the capital, has participated in a venture-capital fund. The same is true for Kyocera, which hopes to use its insider status in the high technology world to identify promising investment targets for the fund.

Three-year-old NEOTENY CO., LTD., which specializes in Internet consulting, has raised $18 million from private equity firm J.H. WHITNEY & CO. and $2 million from PSINET INC. of Herndon, Virginia, one of the world's biggest ISPs. The Tokyo company will use this money to transform itself into Japan's first self-financing Internet incubator. It will provide seed financing as well as a host of other services, including space, professional services and staffing support. Four Internet-related start-ups already are being developed. Neoteny hopes to nurture as many as 90 companies over the next three years, although that will require it to attract additional financing. Stamford, Connecticut-based J.H. Whitney recently has become an active investor in Japan (see Japan-U.S. Business Report No. 362, November 1999, p. 20).

Fledgling on-line broker MONEX INC. has significantly expanded its capital base and, in the process, acquired the backing of two more powerful foreign investors: GOLDMAN, SACHS & CO. and SOROS FUND MANAGEMENT LLC. Along with a few other investors, they bought three-fourths of newly issued Monex shares worth $29.5 million. Operational since last October when brokerage commission fees were completely deregulated, Monex ranks among Japan's top four Internet securities houses. It will use some of the money raised through the third-party allocation to buy a seat on the Tokyo Stock Exchange so that it can start underwriting companies listing their shares on the TSE's recently opened market for start-ups. Other funds will be used to build up Monex's computer systems to support its growing customer base. J.P. MORGAN & CO., INC. also is a minority investor in Monex (see Japan-U.S. Business Report No. 360, October 1999, p. 18).

The liberalization of brokerage commission fees has created new demands for low-cost execution of securities trades. Jersey City, New Jersey-based KNIGHT/TRIMARK GROUP, INC., the largest wholesale market maker in U.S. equities, plans to meet that need through a tie-up with NIKKO SECURITIES CO., LTD. As early as September, they will provide wholesale market-making services in Japanese securities. Although the details need to be worked out, the prospective partners hope to attract not only on-line brokerage firms and their clients but also traditional securities houses interested in reducing the costs associated with their own internal market-making operations. The proposed company, the first of its kind in Japan, will handle all listed stocks, including those traded on the over-the- counter market.

The first proprietary bond trading system in Japan should be operational by June 2000. It will be launched by E-BOND SECURITIES CO., LTD., a company to be formed by LEHMAN BROTHERS HOLDINGS INC. and SOFTBANK FINANCE CORP. to offer on-line trading in Japanese bonds. It will deal primarily in thinly traded issues, such as municipal bonds, bank debentures and corporate bonds. By linking buyers and sellers directly through the Internet, E-Bond, its backers say, will create a much-needed secondary market for low-liquidity securities. That will make it easier for local governments, banks and nonfinancial companies to raise money while also reducing the risk to investors of putting their money in bonds. Initially, Lehman Brothers will have a 40 percent stake in E-Bond to Softbank Finance's 60 percent share, but the pair expects to bring in other companies before on-line trading starts. A December 1998 amendment to the Securities and Exchange Law opened the door for proprietary trading systems.

The lifeline that AETNA INTERNATIONAL INC. threw out to HEIWA LIFE INSURANCE CO., LTD. last year (see Japan-U.S. Business Report No. 363, December 1999, p. 22) has been strengthened. The big Hartford, Connecticut company, which acquired a third of the second-tier insurer's shares at the time, spent $33.8 million to increase its ownership to 92.3 percent. As of April 1, Tokyo-headquartered Heiwa Life will be renamed AETNA- HEIWA LIFE INSURANCE CO., LTD. Before then, Aetna will pump $39 million into the company to better position it to retain existing policyholders as well as attract new ones. Aetna personnel already are working with Heiwa Life in the areas of distribution, product development and asset management.

ALLSTATE INSURANCE CO. has pulled out of the Japanese automobile insurance market after deciding that its resources could be more effectively deployed elsewhere. Until November 1997, the big property and casualty insurer had a joint venture with the Seibu Group that sold a variety of nonlife insurance products. In early 1998, Allstate formed its own subsidiary, which began to sell auto policies by phone and mail in April 1999.

Collaborators since 1966, Lincoln Re, the life reinsurance operation of LINCOLN FINANCIAL GROUP, and KYOEI LIFE INSURANCE CO., the Japanese reinsurance leader, will market services to help life insurers spread the risks of big payouts. KYOEI LINCOLN REINSURANCE SERVICES CO., LTD., which will be in business before the end of the first quarter, will be mainly owned by the Fort Wayne, Indiana company. It will contribute to KLR Services its state-of-the-art risk-management technology, products and services. Kyoei Life brings to the venture its customer base, distribution systems and understanding of Japan's life insurance market and products. In March 1999, Lincoln Re and Kyoei Life entered into a $333.3 million financial reinsurance agreement covering a block of whole life policies.

In anticipation of the introduction of defined contribution pension plans in early 2001, PRINCIPAL FINANCIAL GROUP, the largest administrator of 401(k)-type plans in the United States, and ING GROUP NV of the Netherlands formed an equally owned venture in Tokyo to move into the pension field. The firm will begin operations in the first quarter of 2001. The strength of Des Moines, Iowa-based Principal is providing retirement services to small and midsize companies, a huge market in Japan. ING has sold a range of life insurance products locally since 1986. It has 26 branch offices located in all major cities. Its policies are handled by 5,000 independent agencies as well as by the company's own staff of 200 agents.

Companies setting up defined contribution pension plans soon will be able to contract for consulting services from investment manager FRANK RUSSELL CO. The Tacoma, Washington company hopes this diversification will gain it clients for its pension plan management business. Frank Russell currently offers investment trusts (Japanese-style mutual funds) in conjunc-tion with BANK OF TOKYO-MITSUBISHI, LTD. (see Japan-U.S. Business Report No. 359, August 1999, p. 19).

RISKMETRICS GROUP, which provides risk measurement and analysis to the financial community, opened an office in Tokyo, its first in the Asian Pacific region. The New York City company already has a number of Japanese clients. It also serves multinationals with local operations, including J.P. MORGAN & CO., INC., from which RMG was spun out in September 1998 as an independent venture. Its products span the RiskMetrics, CreditMetrics, DataMetrics and CorporateMetrics risk measurement tools.

An exchange rate of ¥105=$1.00 was used in this report.aaaaaa

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